STOCKS CLIMB OVER THE TOP

Bill BarnhartCHICAGO TRIBUNE

The ember of bullish investor sentiment stoked by the release of weak employment data Feb. 3 glowed again Wednesday as investors liked what they saw in the latest economic reports and pushed the Dow Jones industrial average to a record closing high.

The Dow rose 27.92 points, to 3986.17, one day after the Standard & Poor's 500 index closed at a record high. It took the Dow more than a year to top the previous record-high close, 3978.36, set Jan. 31, 1994.

In between, investors were buffeted by seven increases in short-term interest rates by the Federal Reserve and a historic bear market in bonds. But strong corporate earnings all last year kept stock prices afloat. The lowest close for the Dow last year occurred April 4 at 3593.35, down just 9.7 percent from the Jan. 31 close.

Wednesday's move was broad-based, with advancing issues outnumbering losers 2-to-1 among New York Stock Exchange-listed stocks and the S&P 500 climbing 1.99 points to its second straight record high, 484.54.

That suggests that the rally may have more steam, but skeptics abound. Whether a psychologically significant Dow close at or above 4000 points can be achieved soon remains to be seen.

In the debt market, prices of Treasury bonds ended higher for the third day in a row as a consensus built around the notion that the Federal Reserve is unlikely to raise short-term interest rates again soon. The yield on the benchmark 30-year Treasury bond, which moves opposite to price, dropped to 7.56 percent from Tuesday's 7.59 percent.

The modest gain of 0.3 percent in the consumer price index for January and the 0.3 percent gain in industrial production-both reported Wednesday-suggested to many investors that the hoped-for "soft landing" in the economy after last year's strong growth was indeed possible.

Rob Schumacher, fixed-income portfolio manager at Kemper Financial, said the nuances and outright flaws being recognized in monthly government economic reports are being interpreted with a bullish spin.

For example, he said, Federal Reserve officials went to some pains in releasing the industrial-production figures Wednesday to indicate they are seeing a slowdown in the economy. Elsewhere, there's a growing belief that the consumer price index overstates inflation.

Marshall Front of the Chicago-based money-management firm Trees Front Associates said many industrial managers who not long ago loaded up on raw materials in fear of higher prices now find demand slackening and are looking to trim raw-material inventories.

"You could see some consolidation in the prices of raw materials; perhaps a better word would be `declines,' " he said. "That will cool the Fed's ardor" for raising interest rates.

On the other hand, Fed Chairman Alan Greenspan said Wednesday that evidence of a slowing economy is mixed and "there are reasons for concern" about the inflation outlook. In typical fashion, Greenspan's remarks to bankers meeting in Honolulu could support diametrically opposite predictions of Fed behavior.

But Schumacher said many individual investors are registering their faith that interest rates are peaking by gobbling up Treasury securities, sales of which have picked up even as the redemptions from fixed-income mutual funds continue, he said.

On the equity side, the case for a new bull-market leg in the major stock indexes is hard to make. It will be tough for corporate earnings to keep up the impressive year-over-year percentage gains they've posted in the last two or three years. Certain sectors, including technology stocks, have become richly priced, in the view of many analysts.

Among stocks in the news, software giant Microsoft dropped $1.12, to $60.75, after U.S. District Judge Stanley Sporkin late Tuesday threw out an antitrust settlement between the company and the Justice Department. The stock of Intuit, which produces "Quicken" software and which Microsoft plans to acquire, fell $3, to $65.50.

But market reaction to Sporkin's decision was muted. Richard Goers, technology-portfolio manager at Kemper Financial, said investors in technology stocks were just as interested, if not more, in the bullish earnings report and order-backlog figures released Tuesday by Applied Materials, a California firm that makes equipment used in the manufacturing of semiconductors. The stock gained $2.25, to $47.

Look out below: One reason for the Wall Street rally is the fact that many investors are shifting out of such exotica as Mexican stocks and buying U.S. blue chips. That trend continued Wednesday as the IPC index on the Mexican stock market fell 6.4 percent, or 123.08 points, to a 17-month low of 1798.

A major cause for the drop was news that a Mexican steel company, Grupo Sidek, defaulted on a payment of short-term debt. "This is the tip of the iceberg," a market analyst told Reuters.

Also affecting trading were the country's continuing political turmoil and a rumor, later denied, that the head of Mexico's central bank had resigned.

The peso briefly reached 6.10 pesos to the dollar as its slide continued in foreign-currency trading.